Dual nationals to come under US tax net
ISLAMABAD: The government has geared up efforts to deal with the situation following the enforcement of Foreign Accounts Tax Compliance Act (FACTA) by the United States asking the Pakistanis having US nationality and multinational companies doing business in both the countries to submit taxes on their income to the US IRS.
The apex regulators i.e. State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) have issued necessary instructions for FACTA compliance, which will become effective from July 01, 2014 in Pakistan.
“The move will be hard of Pakistani nationals having US nationality as they will have to submit their taxes to US IRS on their income from United States. The move aims to stop tax evasion by US nationals living in other countries and not reporting the income details to US IRS,” commented a well-placed source in the finance ministry.
The source further said that instructions have been issued to banks, financial institutions, brokerage companies, insurance companies on the guidelines of working group on FATCA and a copy of these instructions is available with the News. The ministry of finance has formed a working group consisting of officials from the Finance Division, SECP, FBR and SBP to devise coordinated action for tackling the emerging situation. The US Congress enacted the Foreign Accounts Tax Compliance Act (FATCA) in March 2010 to counter tax evasion by US taxpayers on their worldwide income. It ruled that all investments (US source and non-US source) and all revenues and proceeds from investments undertaken by a US person need to be reported to the Internal Revenue Service (IRS), irrespective of the type of investment and the location where it is held.
To prevent abuse of the voluntary tax compliance system in the US and to prevent US taxpayers from hiding taxable income in offshore accounts, FATCA requires US withholding agents to withhold 30 percent tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the Internal Revenue Service (IRS) regarding their United States (US accounts). Therefore, the Foreign Financial Institutions (FFIs) not entering into an agreement will be deemed ‘Non-Participating FFIs’ (NPFFIs), and subject to 30% withholding on US source income, and gross proceeds from sale or disposal of investments in US securities and interest bearing assets starting from January 1, 2017.
The SECP and the SBP have issued circular to such companies asking them to do the necessary preparation for registration with US IRA without IGA, if the government of Pakistan decides not to sign IGA with US and Foreign Financial Institutions operating in Pakistan do not get themselves registered with US IRS. So that they could avoid the 30 % withholding on US source income and gross proceeds.
However, considering the timeline involved, it is important for the FFIs in Pakistan to make suitable preparations in case the IGA was not signed by July 1, 2014. Hence, FATCA is not an act/rules that the government of Pakistan would enforce in Pakistan. It is an act applicable on US persons and will be enforced by the United States. The government of Pakistan, in the interest of country’s Financial Institutions (FFIs) is responding to the situation that might emerge as a consequence of FACTA.
FATCA also offers countries around the world to enter into an inter-governmental agreement at the country level to share the information regarding US national/companies accounts. Already 21 countries have signed an IGA with US Treasury Department, 28 are in the final stages and another 40 have initiated discussions or negotiations with TD. Hence, an agreement between the government of Pakistan and US Treasury Department is quite possible.
There are ways to deal with the situation. First is non- inter-governmental agreement according to which the FFIs would be suggested to directly enter into FFI agreement with US IRS. The second is the inter-governmental agreement approach wherein foreign financial institutions report information to national tax authority (Federal Board of Revenue in case of Pakistan), which in turn will report the same to IRS.
When contacted the SECP spokesman said that letters were issued under the recommendations of working group to financial institutions so that they could prepare themselves for the FACTA regime. The SECP is in close liaison with the financial sector companies and they are being consulted to prepare for the FACTA regime, especially the Pakistan banking association is concerned about FACTA and wants government to make arrangements to comply with FACTA.